Wage Price Spiral Flashcards, test questions and answers
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What is Wage Price Spiral?
The Wage Price Spiral is an economic phenomenon that occurs when wages and prices rise in a cyclical manner. This spiral typically begins with a wage increase, which leads to an increase in the cost of goods and services produced by the same workforce. As a result, businesses must raise prices in order to cover their own increased costs, resulting in another wage increase, which then leads to higher prices yet again. The result is a cycle of rising prices and wages that causes inflation.The Wage Price Spiral can be caused by several factors. One factor is the imbalance between aggregate demand and supply within an economywhen people have money to spend but aren’t able to find goods or services they want at the current price level, this leads to an increase in demand for those specific items. This results in businesses raising their prices accordingly and then having to pay more money out as wages to keep up with the higher cost of production. Another factor may be related to labor unions who are able to negotiate large salary increases for their members; this creates pressure on other employers who must pay more money out as well or risk losing qualified workers. Finally, governments may create incentives (such as tax breaks) for certain industries or sectors which lead them to raise wages and/or prices even further than before those incentives were introduced. If left unchecked, the Wage Price Spiral can become self-perpetuating over time due its cyclical nature; it can create stagflation where high inflation is combined with slow or stagnant GDP growth as firms struggle with rising costs while consumers hold back from buying due to higher price levels nationwide. Furthermore, since businesses have been forced into raising wages even though revenues haven’t changed much (due largely to rising costs), profits tend not necessarily follow suitwhich can potentially lead firms into financial crisis if not managed properly over time. To combat this situation governments may attempt various forms of intervention such as introducing wage controls (whereby minimum wage levels are set) or implementing austerity measures that aim at reining in public spending both of which tend not necessarily be popular solutions among citizens/voters either. Overall it’s very difficult for economies stuck within such spirals once they start going it becomes increasingly hard break free from its grasp without external help/intervention (e.g., government policies). Therefore it’s important that policy makers recognize any potential signs early on so measures can be taken swiftly before things get too out of hand.